Dollar hits 20-year high as Fed flags rates higher for longer

On Monday, the US dollar surged to a 20-year high against a basket of currencies, after Federal Reserve Chair Jerome Powell signalled that interest rates would be kept higher for longer, in a bid to bring down soaring inflation.

The dollar index scaled to a fresh two-decade peak of 109.4 in early Asia trade, with greenback strength pushing other major currencies to new lows, and putting pressure on its emerging markets' counterparts.

The dollar hit 138.59 against the Japanese yen in the early Asia trade — the highest since July 21. It was last up 0.59 per cent to 138.485. The offshore yuan similarly fell to a fresh two-year low of 6.9321 per dollar.

The sterling fell to a 2½-year low of $1.1656, and was last down by 0.5 per cent to $1.16715, while the euro fell 0.36 per cent to $0.9929.

The moves extended dollar gains made on Friday, when Powell warned there'd be "some pain" for households and businesses, as it would take time for the Fed to control inflation.

"Powell made it clear that there is no dovish pivot as some market participants had expected," said Carol Kong, senior associate for currency strategy and international economics at the Commonwealth Bank of Australia.

"I think for this week, the [US dollar index] is going to track even higher towards 110 points, just as market participants continue to price in more aggressive tightening cycles by the major central banks."

Markets are now pricing in about a 64.5 per cent chance of a 75 basis point rate hike, at the next Fed meeting in September.

Despite the potential for a hike that big at the European Central Bank's September policy meeting, the euro has struggled with investors more focused on an energy crisis in the bloc.

Russian state energy giant Gazprom is expected to halt natural gas supplies to Europe via its main pipeline from August 31 to September 2 for maintenance.

"Fears over a complete shutdown of Russian gas are going to keep euro/dollar heavy and below parity," said CBA's Kong.

The risk-sensitive Australian and New Zealand dollars were likewise weighed down by the fear that aggressive rate hikes around the world would put the brakes on economic growth. The Aussie was down 0.55 per cent to $0.6853, while the kiwi hit a new one-month low of $0.6105, and last traded 0.33 per cent lower at $0.6113.

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